Like many, I used to think of myself as a fairly rational person who made most decisions based on objective facts. I now realize that assumption is just one more example of the kinds of stories we tell ourselves.
I am an old man and have known a great many troubles, but most of them never happened - Mark Twain
How Madoff made off with others’ cash
(Apologies for the poor pun!)
Bernie Madoff, 82, died a few days ago in prison after serving 12 years out of a 150-year sentence. Madoff ran the largest-ever Ponzi scheme in modern financial history. Incidentally, the word Ponzi has its origins in Charles Ponzi, a conman who, in the early 20th century, spearheaded a financial scheme that ultimately resulted in heavy losses for its investors. It is never a sign of a well-lived life when your name turns into the de facto verb to describe financial swindling.
Here’s how Ponzi schemes work: they are essentially based on the principle of “rob Peter to pay Paul.” First, Paul, on the promise of good returns, hands over his money to the scheme owner to invest (in supposedly sound businesses.) In reality, the owner either siphons the money off or manages it poorly. Then, to pay Paul, the owner appeals to a second person, Peter, who, lured by the promised returns, invests with the scheme. Peter’s money is used to pay Paul’s returns. And so on.
New investors keep the older ones afloat while the perpetrator of the scheme drains everyone’s funds along the way. The scheme apparently looks like its functioning—that is, until the number of investors withdrawing their money is greater than the numbers funding the plan.
Madoff’s Ponzi scheme followed the same principles. Over decades, he took in around $64billion worth of funds from hapless investors and was able to gain and maintain their trust. After the 2008 market crash, when large and small investors started to withdraw their money en masse, the failed scheme was exposed. Madoff was sentenced to serve out the rest of his life in prison.
Madoff was able to retain his many investors because he offered them steady returns when there was rampant market volatility. He did not promise the moon but delivered sufficient returns until the day the system caught up to him.
Madoff’s victims included not just the large investors—hedge funds, private universities, and Hollywood celebrities, but also small investors. In its obituary to Madoff, the NY Times features the story of Phyllis, 74, who developed Parkinson’s disease in her 50s and hoped to live off the comfortable $4million she had invested with Madoff. When the Ponzi scheme was uncovered, Phyllis realized she only had $52,000 left against her name.
Phyllis wasn’t a greedy investor chasing after astronomical returns. On the contrary, she felt Madoff provided her the financial stability at a time of major market unpredictability. She believed she had done her due diligence and yet was defrauded.
The loss hit Phyllis hard because she did not see it coming. Was it because she believed in a story that was so well fabricated that it couldn’t be doubted? Or was she the one telling herself stories in the face of a truth that became harder to acknowledge as time progressed?
The myth of the rational mind
This is not a post about how con artists con. It is an article about why it isn’t just the Phyllis’ of the world, but we, as a collective species, tend to believe in stories that aren’t true. And why we allow ourselves to get conned over and over again.
What are the stories we tell ourselves that get us in (and out of pickles), and why do we engage in such elaborate storytelling?
I want to start by reiterating something I’ve written about before in my post Humans, not Econs because it’s worth repeating. We are anything but rational. I’d go so far as to say that the word human is an apt antonym for the word rational —as appropriate as the word irrational.
One of the main reasons for our irrationality is our affinity for tall tales. We like to both create and propagate stories—some more fantastical than others. Most stories are based on our perceptions rather than reality.
There is a good reason why we love stories, though.
No empty spaces
To understand our attraction to stories, we need to know why nature favors whole over its homophone, hole. For that, we turn to our good friend, science.
Remember high school chemistry lessons about atomic structures?
Most atoms don’t like to be left alone because, in their independent state, they are incomplete and unstable. The exceptions are the noble gases—atoms with naturally full outer shells. So, most atoms tend to form ionic bonds with other atoms by either donating or accepting electrons. This makes their outer electron shells stable.
After the atoms reach a wholesome, stable state, they are content and less inclined to form more chemical bonds.
A similar concept exists in physics.
In strict terms, a true vacuum is a space with no matter. Those are rare on planet earth. When we close a half-filled bottle, for instance, tiny, invisible air molecules rush in to fill the unfilled spaces. What we think of as empty is, in reality, a lot of air.
Nature favors fullness over emptiness.
What do atoms and vacuums have to do with stories, you ask?
Stories we tell ourselves
When presented with discrete facts that don’t tell the whole story, we treat them like unstable atoms or half-filled cans. We can’t bear to see isolated instances of facts hanging on their own. So, we quickly supplement the few facts with creative plotlines to construct a complete story. Like how ionic bonds stabilize atoms, the stories we tell ourselves stabilize detached facts. And, yes, sometimes, we use hot air to fill arguments in the absence of facts.
While we like to believe our storylines are based on fact, they mostly rely on our previous experiences and imaginations.
Let’s say, for example, you are presented with these two statements:
a. Amy bought lottery tickets on Wednesday
b. Amy quit her job on Friday.
If you put the two statements together and assumed that Amy quit her job on Friday because one of those lottery tickets was a winner, you wouldn’t be alone in making that logical leap. It is also very likely you didn’t come to that conclusion this time because I already laid the groundwork about storylines being the subject of this article. So, you are extra careful to be clever, i.e., not connect potentially unrelated events.
The reality, though is, we don’t get the advantage of such context clues in real life. Therefore, unbeknownst to us, we make snap judgments. All the time. And that’s not a bad thing at all. We need to. For survival.
Why we love stories
In our daily lives, we don’t have the luxury of taking every scenario and objectively reasoning it all the way through. At any point in time, we are inundated with millions of bits of information. We’d stop functioning if we were to pay equal attention to all of them. It would be a case of analysis-paralysis times infinity. So, we shortcut the process by filtering out and absorbing a tiny fraction of what we are presented with. Behavioral psychologist Daniel Kahneman refers to this as System 1 vs. System 2 thinking.
In doing so, however, we grant ourselves creative license to insert fiction where facts are unavailable in a way that makes sense to us. And sometimes we even go far enough to substitute facts with fiction—to suit our convenience.
Objective truth and rationality are like bit players in this unfolding Shakespearean drama; they may or may not have parts in the final production.
All that said, there are consequences to our storytelling.
Our very survival depends on rapid decision-making and imaginative thinking.
This imagination is what keeps us from killing one another. It’s what stops us from saying what we really think when we are asked for our opinions on someone’s work or how someone’s outfit looks. In other words, this creative endeavor defines what we refer to as civilization and what separates us from other species that roam the world. The alternative, the “no-filters” version of ourselves, isn’t conducive to our survival as a species because if everyone simply said and did how they felt, not many of us would still be left on the planet.
Imagine the chaos that would ensue if we didn’t all agree on some fundamental tenets required for society to function. Such as:
Sharing (good), killing (wrong), yelling (bad), being kind (good), etc.
It would be remiss of me not to quote a line from my all-time favorite book by Yuval Noah Harari.
There are no gods, no nations, no money and no human rights, except in our collective imagination ― Yuval Noah Harari, Sapiens: A brief history of humankind
In other words, the world, as we know it today, would not exist were it not for the stories we tell ourselves.
On the flip side, the ability to create stories can land us in a pretty pickle or two.
Psychologist Dunning (famous for his cognitive bias theory, Dunning Kruger effect) also published another paper about “Wishful seeing.” The premise of this paper is that we don’t perceive things as they are. Instead, we see what we wish to see.
Ain’t that the truth?
Just like how optical illusions are created because our brains differ in how they perceive and interpret optical signals, our perception of the world of events can be illusory too.
While facts may be objective, they can tell completely different stories when they are seen from different perspectives or woven into storylines. This is why two individuals can look at the same set of facts and come to entirely different conclusions.
Think about the stock market, for instance. The two sides involved in a trade, the buyer and seller, both typically have access to the same information. The buyer feels the stock is lower priced and has the ability to increase in value, whereas the seller feels the stock is already at its peak and may lose value.
Same facts, opposing conclusions. How do we explain that? It’s because we overlay our own experiences and expectations (wishful thinking) on facts to construct stories. Furthermore, we are convinced the stories we tell ourselves are the right ones. Sometimes it works, and at other times, it doesn’t. But that doesn’t stop us from being convinced.
And then, in some instances, like in Phyllis’ case in the Madoff saga, the stories we tell ourselves backfire. Quite spectacularly.
While it is easy to reproach Phyllis for poor judgment, in reality, her storyline simply went awry, or in layman’s terms, she had a case of bad luck. In hindsight, of course, Phyllis would have known when things started to look “too good to be true,” but that’s why such reasoning is called hindsight bias. It’s easy to have perfect 20/20 vision when you look back.
The best proofreading happens after you hit send.
Our imagined realities and the narratives we tell ourselves will always remain an integral part of our existence. That said, we all need to watch out for that can have pretty serious consequences.
What happens when we encounter objective facts that contradict our deeply held storylines?
It is not possible to hold two incongruous thoughts on matters that directly impact us. Like oil and water, or like legos and your feet—they simply cannot coexist. Something has to give. In the same vein, when presented with facts that directly counter our beliefs, it creates a state of imbalance, or, in fancier terms, a state of cognitive dissonance.
The trouble with cognitive dissonance is that we cannot hold two incompatible thoughts in our heads. We, therefore, either have to give up on our beliefs or modify our storylines to rationalize our beliefs, i.e., create additional stories we tell ourselves to make us feel better.
The conflict between facts and beliefs
When faced with an objective fact that contradicts a long-held belief, two actions are possible:
a) Change the belief in light of the new fact OR
b) Ignore the fact through denial and rationalization and create an even more compelling storyline to strengthen the belief.
No breaking news here, but we all know that, though option (a) seems like the right thing to do, option (b) is the outright winner in our society. Choosing (a), i.e., changing long-standing beliefs, would mean acknowledging you were incorrect about something in the first place. It can be identity-threatening.
Suppose you’re on a diet, but then it’s your coworker’s birthday, and there are donuts in the break room. You reach for a donut, telling yourself it would be offensive to your coworker if you didn’t eat one on her birthday.
The fact is this: diets and donuts don’t mix. So, instead of the correct behavior in the light of the fact, not eating a donut, you create a new storyline about not offending your coworker. The result? You’ve convinced yourself you’ve done the right thing. But, have you?
Now you know what causes all those “How can you not see that?” situations —the ones that make us want to throw our phones or scream at the TV. Cognitive dissonance, like most other shortcomings, is easier to spot in others than ourselves. And that’s because we’re all class A storytellers.
Our love for stories, especially the stories we tell ourselves, is inherent to our nature. This is why well-written whodunits keep us up all night, even if it means showing up bleary-eyed to the 8 a.m. work meeting the next day.
While our love for stories is significant, we have unique places for self-directed stories that make us feel peaceful and content. There is a legitimate place for this kind of storytelling, aka self-deception. Without it, our survival would be in jeopardy. But before we accuse others of overlooking facts, it would help to remind ourselves that each one of us is just as capable of writing flash fiction as any other person. Otherwise, we risk being like Jim Carrey in the Truman Show, where everyone but him knows that they’re on the set of a TV show.
History is a set of lies agreed upon – Napoleon Bonaparte